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There is a second American Revolution occurring. As in the first, the motive is taxes and the cry is that the government is applying "taxation without representation". However, the new twist is that the government that is not providing proper representation to the U.S. taxpayer is the U.S. government. As in the first revolution, this protest is resulting in a group of people who have decided that the most effective protest that they could make is to "take their money and run".

Some of these tax exiles are heading straight to traditional tax havens in the Caribbean, Central America and Europe. In addition a significant number of people are looking at an unlikely tax havens such as Ireland, the United Kingdom and Canada. The choice of which place to go depends greatly upon the type of lifestyle that the person wants to maintain. Another factor is the type of offshore strategy that the person wants to adopt.

In this paper, I will outline a two possible strategies that can quickly result in a significant decrease in dollars lost to tax hungry governments.

I apologize in advance to those readers who already know about these concepts, but it is crucial that you have a thorough understanding of these definitions and their relevance.

Residency generally has both a tax and an immigration element. Tax residency is usually based upon a count of the number of days in a jurisdiction or a review of various indicia of residency indicating centralization of living in the jurisdiction. Immigration residency is usually granted on a temporary or permanent basis. It may allow physical presence, re-entry, employment or study rights and land ownership.

Domicile is an estate tax concept that looks at a person’s "ultimate home". All persons, even "perpetual tourists" are deemed under law to have a domicile. A person acquires a "domicile of origin" at birth. They may then acquire a "domicile of choice" by changing their residence and acquiring long-term indicia of domicile, such as grave sites and new wills. They can then acquire a subsequent "domicile of choice" by severing these ties and re-acquiring the same in a new jurisdiction. If a person abandons their last domicile of choice without acquiring a new one, then their domicile either reverts back to their last domicile under the U.S. rule or their domicile of origin under the British rule.

Citizenship is a status granted by a country and may include various rights such as travel documents (passports), voting, land ownership, and the ability to hold public office, etc. A country may choose to grant citizenship through various methods, including:

• birth in the jurisdiction;
• lineage (through parents and grandparents);
• marriage;
• naturalization;
• religious affiliation (ie: law of return to Israel);
• meritorious service;
• economic benefit to the country.

(the section 911 strategy)

In order for an American to become a non-resident "qualified individual", they must change their residency from the U.S. The immediate advantage is in the area of income tax, where the person will be entitled to a holiday on their first $70,000 of foreign earned income. Under the U.S. Taxpayer Relief Act 1997, this exclusion will be increased by $2000 per year starting in 1998 and will be capped at $80,000 in 2002. After 2007, the $80,000 will be indexed to the cost of living adjustment. A second advantage may be available through the wise use of tax treaty provisions in granting relief on some foreign capital gains, U.S. source income and pension income.

The person can also deduct housing expenses in excess of a base amount of approximately $7000 a year. A person can become a "qualified individual" under either the bona fide residence test or the physical presence test. In either case, they must have their tax home in a foreign country. The exclusion does not apply to U.S. government employees working abroad.

Physical Presence

Either a U.S. citizen or a resident alien with a tax home in a foreign country can become a qualified individual if, during any period of twelve consecutive months, they are present in one or more foreign countries during at least 330 full days. This test requires physical presence in foreign countries for at least eleven out of the twelve months.

Bona Fide Residence

A U.S. citizen with a tax home in a foreign country can become a qualified individual by establishing to the satisfaction of the IRS that they have been a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire taxable year.

Tax Home

A person must have their tax home in a foreign country in order to be a qualified individual. An individual’s tax home is located at their regular or principal place of business. If they have none, then it is at their regular place of abode in a real and substantial sense. If a taxpayer cannot prove that they have a tax home in a foreign country they are considered to be an itinerant and will not be entitled to any exclusion.

When acquiring a new residency, the person wants to make sure that they don’t jump out of the U.S. tax pot and into another country’s tax fire. In addition, since this strategy often
involves other family members and personal and business realities, it must be a plan that is relatively easy to set into place and to live with. In addition, it must provide a level of comfort to the person and to their families in both the short and long term.

Let us take a brief look at each step that a person must take to make this strategy work for them. As I outline these steps, try to imagine your situation and the degree of ease/difficulty, cost, and familiarity/lack of personal disruption that result from moving to any of your potential target countries.

Steps

1.Acquiring a Tax Home in Target Country

When the person is establishing their strategy, they should consult qualified immigration counsel to determine if they could qualify for permanent residence in their potential tax
home. Proper advice at this stage will ensure that the permanent residence visa is in hand at the appropriate time and at the lowest possible cost. In addition, the person should also consult with tax counsel who understand issues in both the U.S. and the target country, to put approximate tax planning structures in place prior to taking up the permanent residence.

2.Severing U.S. Residency

Although the U.S. bases its residency tests on a day count, it is prudent for the person to also sever as many other ties as possible in the U.S. If there are only ties to the new
country, it is also easier to establish that it is the new tax home. As quickly as possible, the person should take steps to rid themselves of U.S. based assets both to get immediate asset protection and to avoid any future encumbrances that the U.S. government may wish to impose.

3.Maintaining Non-Resident Status

As U.S. citizens, there is still a requirement to file tax returns, even if no tax is payable. A Congressional study concluded that up to 61 percent of Americans living abroad who should be filing returns are not doing so. In an continuing effort to improve compliance, the Tax Reform Act of 1986 requires every U.S. citizen who applies for a passport after 1987 to file an IRS information return reporting foreign residence and other useful information.

Once the tax home is established and the person has meet one of the residency tests, they should be careful to ensure that all necessary tax filings are done and that any tax owed is promptly paid. Failure to do so can result in the IRS taking the position that the person is not a qualified person and assess tax without any excemptions. If the person has left assets in the U.S. then they are an easy enforcement target.

STRATEGY 2:

In order for an American to become a Taxpatriate they must change their residency, domicile, and citizenship from the U.S. Like a non-resident U.S. citizen, they want to make sure that they don’t jump out of the U.S. tax pot and into another country’s tax fire. 

I have attached a case study which I have titled "H. Alger sets himself free". This case study is a combined example of several previous cases that I completed. In this case study, the person was a U.S. citizen, who was also a resident and domiciled in the United States. In this example, the person acquired a new "instant citizenship". In addition, he acquired a permanent residence in Canada that resulted in Canadian citizenship after three years of residence. Finally, he took steps to acquire a new domicile in his ultimate destination in the Bahamas.

Taxpatriates are also going to other interim destinations with different naturalization periods such as Ireland (5 years), U.K. (6 years), Australia (3 years), and New Zealand (3 years).  In addition, some Taxpatriates do not bother with an interim destination, as they have already secured a passport that they feel comfortable living with for the rest of their lives. Let us take a brief look at each step that the Taxpatriate must take.

Steps

1.Acquiring a New Citizenship: Lineage, Religious Affiliation, Economic Benefit, Naturalization

In acquiring a new citizenship, the person should first look at their background to determine if they have a right to another nationality through either lineage or religious affiliation. They should be careful not to trigger unwanted residency or military obligations.

If these are unavailable or unattractive, the person should then decide if they wish to wait the period for a naturalization passport or spend the money on an instant citizenship.
This decision will be based on: when they wish to sever their U.S. tax liability; their comfort in living and traveling on the instant passport; and their liquidity to purchase one of these citizenships.

In choosing an instant passport, the client should also take into account the additional visa-free travel that their permanent residence gives. This is particularly important if the
client wants to travel to the U.S. without any hassles. For example, a Grenadian citizen who is also a permanent resident of Canada or Bermuda does not need a U.S. visa from
the State Department to travel to the U.S. A citizen of Cape Verde will always need a U.S. visa even if they are a permanent resident of Canada or Bermuda.

I have attached some information on a very attractive program in Grenada. If you are interested in receiving more information on this program, please -  Click Here - 

2.Getting Rid of U.S. Citizenship

This step can be delayed until the person has secured their naturalization citizenship and has the comfort of knowing that they will be traveling on a first-country passport. However, if they delay this step until that time, they will be retaining their U.S. tax liability. 

U.S. citizenship can be lost through either formal renunciation or through relinquishment by committing a potentially expatriating act (such as acquiring foreign citizenship) with
the intention of losing U.S. citizenship. The formal renunciation procedure is relatively straight-forward and involves making an appearance in front of a State Department
official in the Consular Section of a U.S. Embassy or Consulate and signing a few forms. Relinquishment must be carefully orchestrated and documented and ultimately is
completed by the completion of a questionnaire which sets out both the act and the demonstration of intention.

On September 30, 1996, a change in the U.S. immigration legislation attempted to stop the flow of Taxpatriates. Fortunately for Taxpatriates, the section is easily avoided by
some proper planning and does not act as any barrier to persons wishing to exercise this option. Future provisions are unlikely as the constitutionality of the existing provision has
be challenged by no less that the Attorney General of the U.S. (the person who is supposed to enforce it!).

3.Assuming Permanent Residence in Naturalization Country

When the client is establishing their strategy, they should consult counsel to determine if they quality for permanent residence in their target naturalization country and to put
approximate tax planning structures in place prior to taking up the permanent residence and tax residence status.
.
4.Establishing a New Domicile of Choice Outside of the U.S.

In my example, H. Alger had a long-term intention to "retire" in the Bahamas. Therefore, at a very early stage, he laid down the roots of domicile in the Bahamas, even while he was a permanent resident in Canada. This type of "dual tracking" must be done properly to ensure that the person meets the requirements to maintain their permanent residence;
qualify for naturalization citizenship; and acquire a new domicile of choice outside of the United States.

It is worth noting that some naturalization countries such as Canada do not have any estate taxes and are therefore a suitable option for a long-term domicile. As a result, some people choose to remain in their chosen naturalization country after they acquire citizenship because it is a nice place to live, if they have effectively sheltered themselves from a local tax bite.

5.Acquiring Naturalization Citizenship

As previously mentioned, a person must meet the appropriate residence requirement in order to qualify for a naturalization citizenship. If the person is not spending time in the
U.S. (because of the potential for U.S. tax liability); and has chosen the naturalization country for their domicile (or has not yet decided on a long-term alternate domicile) then
they will probably be spending a significant amount of time in the naturalization country and will not have difficulty in qualifying for citizenship.

It is significant that, once any of the above mentioned naturalization citizenship are secured, there is no on-going obligation to maintain any contact in order to remain a citizen. In theory, once a person becomes a naturalized citizen they can leave the naturalization country; live and travel wherever they wish; stop and pick up a new passport at an Embassy when it expires or is full; and never even file tax returns in the naturalization country.

Persons like H. Alger who are setting up alternate domiciles early, or who will be remaining resident in the U.S. for the next few years to clear up business or personal matters, need a detailed strategy. Such strategy must be laid out and agreed upon by foreign and U.S. counsel to ensure all objectives are met and no unwanted obligations are triggered. This type of strategy must match the person’s lifestyle or they will never adhere to it. This is not a do-it-yourself project or one where you scrimp on the quality of your advisors.

For those persons who qualify through lineage for a first country passport, they still find it worthwhile to go through Canadian permanent residence and citizenship. Such residence allows them to use a number of legal "Cinderella" strategies for extending the number of days they are physically in the U.S. without re-acquiring U.S. tax liability. In addition, they can use various parts of the Canada-U.S. Tax Treaty to their advantage. Finally, possession of Canadian citizenship also allows them visa-free travel to the U.S., along with numerous advantages under the North American Free Trade Agreement.

6.Changing Residence to a Tax Haven

For those persons who are not choosing to remain in the naturalization country, then they must decide where their long-term residence and domicile of choice will be. Presumably this will be a low or no tax jurisdiction which fits their lifestyle. When leaving the naturalization country, they must again follow the advice of their local counsel to ensure that the break is clean and does not leave any connections that could maintain any tax liability.

I wish to make a quick comment on the so-called "PT" or "perpetual tourist" strategy. For those of you who have not heard of this strategy it involves simply moving out of a high tax
jurisdiction like the U.S., U.K., or Canada and beginning the life of a vagabond. In other words, spending the rest of your life traveling from jurisdiction to jurisdiction every few
months. Its advocates claim that by maintaining this "low profile" lifestyle you will be able to avoid any tax liability anywhere. I have several problems with this strategy.

Firstly, moving from place to place with few possessions; no "home", either mentally or practically; and not really having any long-term plan, is not the type of strategy that most people feel comfortable with. They may travel a lot, but they like having friends, country club memberships, and a place to call their own.

Secondly, the PT strategy relies completely on secrecy or low-profile for success. With decreasing bank secrecy and increasing government databases looking for money launderers, people are justifiably nervous about being able to successfully live a "cloak and dagger" existence.

Finally, everyone should be aware that unless they acquire a new domicile and a new residence, the country which they have left will consider that their previous residence and domicile were never severed as no new "tax home" was established. In other words, getting rid of indicia of residence in one jurisdiction is not enough to sever residence. You must re-acquire these indicia in another jurisdiction.

First a person should set up a "bullet-proof" vest of tax strategy. If they then wish to add on the clothing of privacy to prevent being shot at, then all the better. But a dark coat alone
will not stop a tax bullet. Generally people want the comfort of knowing that if everything about them was found out, it wouldn’t matter anyway because their affairs are in perfect legal order. 

I believe that I have set out two strategies that will allow clients to seek a level of tax relief that is equal to their lifestyle. With increasing U.S. government hostility towards Americans who have income, capital gains, and estates, many are considering moving out of the U.S. tax net. At the same time as the avarice of the U.S. government has increased, the means to live and work comfortably in many places has increased significantly. Federal Express, digital phones, low cost and extensive plane travel and the internet have made it much more attractive for people to "leave on a jet plane".